1. 2-1 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Chapter 2 T heories of T rade, I nvestment and I nternationalisation 2

2. 2-2 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Lecture/Chapter Topics Chapter Introduction Theories of International Trade Theories of Internationalisation of the Firm Theories of International Investment Implications for International Business

3. 2-3 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Chapter Introduction This chapter: Presents theories that explain why it is beneficial for a country to engage in international trade Explains the pattern of international trade that is observed in the world economy

4. 2-4 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Theories of International Trade An Overview of Trade Theory –Free trade refers to a situation where a government does not attempt to influence through quotas or duties what its citizens can buy from another country or what they can produce and sell to another country.

5. 2-5 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Theories of International Trade The Benefits of Trade –The theories of Smith, Ricardo and Heckscher-Ohlin show why it is beneficial for a country to engage in international trade, even for products it is able to produce for itself. –International trade allows a country to specialise in the manufacture and export of products that can be produced most efficiently in that country, and import products that can be produced more efficiently in other countries.

6. 2-6 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Theories of International Trade The Pattern of International Trade –Some patterns of trade are fairly easy to explain - it is obvious why Saudi Arabia exports oil, Ghana exports cocoa, and Brazil exports coffee. –But, why does Switzerland export chemicals, pharmaceuticals, watches and jewellry? Why does Japan export automobiles, consumer electronics and machine tools?

7. 2-7 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Theories of International Trade Trade Theory and Government Policy –Trade theories lack agreement in their recommendations for government policy. –Mercantilism makes a crude case for government involvement in promoting exports and limiting imports.

8. 2-8 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Theories of International Trade Trade Theory and Government Policy (Cont’d) –The theories of Smith, Ricardo, and Heckscher-Ohlin promote unrestricted free trade. –New trade theory and Porter’s theory of national competitive advantage justify limited and selective government intervention to support the development of certain export-oriented industries.

9. 2-9 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Theories of International Trade Mercantilism –Mercantilism, which emerged in England in the mid-16 th century, asserted that it is in a country’s best interests to maintain a trade surplus, to export more than it imports. –Mercantilism advocated government intervention to achieve a surplus in the balance of trade.

10. 2-10 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Theories of International Trade Mercantilism (Cont’d) –It viewed trade as a zero-sum game, one in which a gain by one country results in a loss by another. –As an economic philosophy, mercantilism is problematic and not valid, yet many political views today have the goal of boosting exports while limiting imports by seeking only selective liberalisation of trade.

11. 2-11 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Theories of International Trade Absolute Advantage –In 1776, Adam Smith attacked the mercantilist assumption that trade is a zero-sum game and argued that countries differ in their ability to produce goods efficiently, and that a country has an absolute advantage in the production of a product when it is more efficient than any other country in producing it.

12. 2-12 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Theories of International Trade Absolute Advantage (Cont’d) –According to Smith, countries should specialise in the production of goods in which they have an absolute advantage and then trade these goods for the goods produced by other countries.

13. 2-13 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Theories of International Trade Assume that two countries, Ghana and South Korea, both have 200 units of resources that could be used to produce either rice or cocoa. –In Ghana, it takes 10 units of resources to produce one ton of cocoa and 20 units of resources to produce one ton of rice. –So, Ghana could produce 20 tons of cocoa and no rice, 10 tons of rice and no cocoa, or some combination of rice and cocoa between the two extremes.

14. 2-14 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Theories of International Trade –In South Korea it takes 40 units of resources to produce one ton of cocoa and 10 units of resources to produce one ton of rice. –So, South Korea could produce 5 tons of cocoa and no rice, 20 tons of rice and no cocoa, or some combination in between. –Ghana has an absolute advantage in the production of cocoa. –South Korea has an absolute advantage in the production of rice.

15. 2-15 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Theories of International Trade Without trade: –Ghana would produce 10 tons of cocoa and 5 tons of rice –South Korea would produce 10 tons of rice and 2.5 tons of cocoa If each country specialises in the product in which it has an absolute advantage and trades for the other product: –Ghana would produce 20 tons of cocoa –South Korea would produce 20 tons of rice –Ghana could trade 6 tons of cocoa to South Korea for 6 tons of rice

16. 2-16 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Theories of International Trade After trade: –Ghana would have 14 tons of cocoa left, and 6 tons of rice –South Korea would have 14 tons of rice left and 6 tons of cocoa –Both countries gained from trade

17. 2-17 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Theories of International Trade Comparative Advantage –In 1817, David Ricardo took Adam Smith’s theory one step further by exploring what might happen when one country has an absolute advantage in the production of all goods. –It makes sense for a country to specialise in the production of those goods that it produces most efficiently and to buy the goods that it produces less efficiently from other countries, even if this means buying goods from other countries that it could produce more efficiently itself.

18. 2-18 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Theories of International Trade Assumption –Ghana is more efficient in the production of both cocoa and rice. –In Ghana, it takes 10 units of resources to produce one ton of cocoa, and 13 1/3 units of resources to produce one ton of rice. –So, Ghana could produce 20 tons of cocoa and no rice, 15 tons of rice and no cocoa, or some combination of the two.

19. 2-19 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Theories of International Trade Assumption (Cont’d) –In South Korea, it takes 40 units of resources to produce one ton of cocoa and 20 units of resources to produce one ton of rice. –So, South Korea could produce 5 tons of cocoa and no rice, 10 tons of rice and no cocoa, or some combination of the two. –If each country specialises in the production of the good in which it has a comparative advantage and trades for the other, both countries will gain.

20. 2-20 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Theories of International Trade With trade: –Ghana could export 4 tons of cocoa to South Korea in exchange for 4 tons of rice. –Ghana will still have 11 tons of cocoa, and 4 additional tons of rice. –South Korea will have 6 tons of rice and 4 tons of cocoa.

21. 2-21 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Theories of International Trade The Gains from Trade –The theory of comparative advantage argues that trade is a positive sum gain in which all gain. –It provides a strong rationale for encouraging free trade.

22. 2-22 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Theories of International Trade Qualifications and Assumptions –The simple example of comparative advantage rests on a number of assumptions: only two countries and two goods; zero transportation costs; similar prices and values; resources are mobile between goods within countries, but not across countries; constant returns to scale; fixed stocks of resources; and no effects on income distribution within countries.

23. 2-23 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Theories of International Trade Simple Extensions of the Ricardian Model –Immobile Resources  Resources do not always move freely from one economic activity to another. –Dynamic Effects and Economic Growth –Trade might increase a country's stock of resources as increased supplies become available from abroad. –Free trade might increase the efficiency of resource utilisation, and free up resources for other uses.

24. 2-24 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Theories of International Trade The Samuelson Critique –Samuelson argues that the ability to offshore services jobs that were traditionally not internationally mobile may have the effect of a mass inward migration into the United States, where wages would then fall.

25. 2-25 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Theories of International Trade Evidence for the Link between Trade and Growth –Studies exploring the relationship between trade and economic growth suggest that countries that adopt a more open stance toward international trade enjoy higher growth rates than those that close their economies to trade.

26. 2-26 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Theories of International Trade Heckscher-Ohlin Theory –Heckscher and Ohlin argued that comparative advantage arises from differences in national factor endowments. –The Heckscher-Ohlin theory predicts that countries will export goods that make intensive use of those factors that are locally abundant, while importing goods that make intensive use of factors that are locally scarce.

27. 2-27 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Theories of International Trade The Leontief Paradox –In 1953, Wassily Leontief postulated that since the US was relatively abundant in capital compared with other nations, the US would be an exporter of capital-intensive goods and an importer of labour-intensive goods.

28. 2-28 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Theories of International Trade The Leontief Paradox (Cont’d) –However, he found that US exports were less capital- intensive than US imports. –Since this result was at variance with the predictions of the theory, it has become known as the Leontief Paradox.

29. 2-29 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Theories of International Trade The Product Life-Cycle Theory –In the mid-1960s, Raymond Vernon proposed the product life-cycle theory that suggested that as products mature both the location of sales and the optimal production location will change, affecting the flow and direction of trade.

30. 2-30 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Theories of International Trade The Product Life-Cycle Theory (Cont’d) –Early in the life-cycle of a typical new product, while demand is starting to grow in the US, demand in other advanced countries is limited to high-income groups, and so while it is not worthwhile for firms in those countries to start producing the new product, some exports from the US to those countries are necessary.

31. 2-31 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Theories of International Trade The Product Life-Cycle Theory (Cont’d) –Over time, demand for the new product starts to grow in other advanced countries, making it worthwhile for foreign producers to begin producing for their home markets. – US firms might also set up production facilities in those advanced countries where demand is growing, limiting the exports from the US.

32. 2-32 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Theories of International Trade The Product Life-Cycle Theory (Cont’d) –As the market in the US and other advanced nations matures, the product becomes more standardised, and price becomes the main competitive weapon. –Producers based in advanced countries where labour costs are lower than in the US might now be able to export to the US.

33. 2-33 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Theories of International Trade The Product Life-Cycle Theory (Cont’d) –If cost pressures become intense, developing countries begin to acquire a production advantage over advanced countries. –The United States switches from being an exporter of the product to an importer of the product as production becomes more concentrated in lower-cost foreign locations.

34. 2-34 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Theories of International Trade Evaluating the Product Life-Cycle Theory –While the product life-cycle theory accurately explains what has happened for products like photocopiers and a number of other high technology products developed in the US in the 1960s and 1970s, the increasing globalisation and integration of the world economy has made this theory less valid in today's world.

35. 2-35 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Theories of International Trade New Trade Theory –New trade theory suggests that because of economies of scale (unit cost reductions associated with a large scale of output) and increasing returns to specialisation, in some industries there are likely to be only a few profitable firms. –Firms with first mover advantages (the economic and strategic advantages that accrue to many entrants into an industry) will develop economies of scale and create barriers to entry for other firms.

36. 2-36 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Theories of International Trade Increasing Product Variety and Reducing Costs –A nation may be able to specialise in producing a narrower range of products than it would in the absence of trade, yet by buying goods that it does not make from other countries, each nation can simultaneously increase the variety of goods available to its consumers and lower the costs of those goods.

37. 2-37 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Theories of International Trade Economies of Scale, First Mover Advantages and the Pattern of Trade –The pattern of trade we observe in the world economy may be the result of:  First mover advantages  Economies of scale

38. 2-38 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Theories of International Trade Implications of New Trade Theory –New trade theory suggests that nations may benefit from trade even when they do not differ in resource endowments or technology, and that a country may predominate in the export of a good simply because it was lucky enough to have one or more firms among the first to produce that good.

39. 2-39 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Theories of International Trade Implications of New Trade Theory (Cont’d) –While this is at variance with the Heckscher-Ohlin theory, it does not contradict comparative advantage theory, but instead identifies a source of comparative advantage. – An extension of the theory is the implication that governments should consider strategic trade policies that nurture and protect firms and industries where first mover advantages and economies of scale are important.

40. 2-40 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Theories of International Trade National Competitive Advantage: Porter’s Diamond –Porter’s 1990 study tried to explain why a nation achieves international success in a particular industry and identified four attributes that promote or impede the creation of competitive advantage.

41. 2-41 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Theories of International Trade Porter’s Diamond of competitive advantage

42. 2-42 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Theories of International Trade National Competitive Advantage (Cont’d) –Factor Endowments  A nation's position in factors of production can lead to competitive advantage.  These factors can be either basic (natural resources, climate, location) or advanced (skilled labour, infrastructure, technological know-how).

43. 2-43 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Theories of International Trade National Competitive Advantage (Cont’d) – Demand Conditions  The nature of home demand for the industry’s product or service influences the development of capabilities.  Sophisticated and demanding customers pressure firms to be competitive.

44. 2-44 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Theories of International Trade National Competitive Advantage (Cont’d) –Relating and Supporting Industries  The benefits of supplier industries and related industries that are internationally competitive can spill over and contribute to other industries.  Successful industries tend to be grouped in clusters in countries; having world-class manufacturers of semi-conductor processing equipment can lead to (and be a result of having) a competitive semi-conductor industry.

45. 2-45 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Theories of International Trade National Competitive Advantage (Cont’d) –Firm Strategy, Structure and Rivalry  Different nations are characterised by different management ideologies, which either help them or do not help them to build national competitive advantage.  There is a strong association between vigorous domestic rivalry and the creation and persistence of competitive advantage in an industry.

46. 2-46 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Theories of International Trade Evaluating Porter’s Theory –Government policy can affect demand through product standards, influence rivalry through regulation and antitrust laws, and impact on the availability of highly educated workers and advanced transportation infrastructure. –The four attributes, government policy, and chance work as a reinforcing system, complementing each other and creating in combination the conditions appropriate for competitive advantage.

47. 2-47 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Implications for International Business There are at least three main implications for international businesses: location, first-mover and government policy implications. Location Implications –One way in which the material discussed in this chapter matters to an international business is the link between the theories and a firm’s decision about where to locate its productive activities.

48. 2-48 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Implications for International Business Location Implications (Cont’d) –It makes sense for a firm to disperse its various productive activities to those countries where they can be performed most efficiently. First Mover Advantages –Being a first mover can have important competitive implications, especially if there are economies of scale and the global industry will only support a few competitors.

49. 2-49 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Implications for International Business Government Policy Implications –Government policies with respect to free trade or protecting domestic industries can impact significantly on global competitiveness. –Businesses should work to encourage governmental policies that support free trade.

50. 2-50 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Theories of Foreign Direct Investment FDI Theories Explain: –Why a firm will favour direct investment as a means of entering a foreign market when two other alternatives are possible, exporting and licensing. –Why firms in the same industry often undertake foreign direct investment at the same time. –Why certain locations are favoured over others as targets for foreign direct investment.

51. 2-51 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Theories of Foreign Direct Investment Dunning’s Eclectic Paradigm –This paradigm attempts to combine the two other perspectives into a single holistic explanation of foreign direct investment. –‘Eclectic’ here refers to picking the best aspects of other theories and combining them in a single explanation.

52. 2-52 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Theories of Foreign Direct Investment What is Foreign Direct Investment? –Foreign direct investment (FDI) occurs when a firm invests directly in new facilities to produce and/or market in a foreign country. –Once a firm undertakes FDI it becomes a multinational enterprise.

53. 2-53 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Theories of Foreign Direct Investment Why Foreign Direct Investment? –Firms have two alternatives besides FDI available to them for exploiting the profit opportunities in a foreign market— exporting and licensing. –Foreign direct investment may be both expensive and risky when compared to exporting and licensing.

54. 2-54 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Theories of Foreign Direct Investment Why Foreign Direct Investment? (Cont’d) –Seeking new markets and access to resources –Seeking improved efficiency by moving to countries that may offer cost-related advantages, investment incentives or science and industrial parks –Seeking ‘strategic assets’ by investing in local firms to secure access to distribution networks and gain local knowledge and other ownership advantages

55. 2-55 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Theories of Foreign Direct Investment Internalisation Theory –This branch of theory seeks to explain why firms often prefer foreign direct investment to licensing as a strategy for entering foreign markets. –When market imperfections are making transactions less efficient a company may undertake FDI. –Market imperfections include trade barriers and the protection of specialised knowledge.

56. 2-56 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Theories of Foreign Direct Investment Internalisation Theory (Cont’d) –Limitations of Exporting  The viability of an exporting strategy is often constrained by transportation costs and trade barriers.  When transportation costs are added to production costs, it becomes unprofitable to ship some products over a large distance.  Some foreign direct investment is undertaken as a response to actual or threatened trade barriers such as import tariffs or quotas.

57. 2-57 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Theories of Foreign Direct Investment Internalisation Theory (Cont’d) –Limitations of Licensing  Giving away valuable technological know-how to a potential foreign competitor  Licensing does not give a firm the tight control over manufacturing, marketing and strategy in a foreign country that may be required to maximise its profitability  Capabilities are often not amenable to licensing

58. 2-58 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Theories of Foreign Direct Investment Internalisation Theory (Cont’d) –Advantages of Foreign Direct Investment  Alternative way of entering foreign markets when transportation costs or trade barriers make exporting unattractive  Allows control over a firm’s technological know-how or over its operations and business strategy, or when the firm’s capabilities are simply not amenable to licensing, as may often be the case

59. 2-59 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Theories of Foreign Direct Investment Pattern of Foreign Direct Investment –Firms in the same industry often undertake foreign direct investment at around the same time. –Firms tend to direct their investment activities towards certain locations.

60. 2-60 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Theories of Foreign Direct Investment Pattern of Foreign Direct Investment (Cont’d) –Strategic Behaviour  Oligopoly: An industry composed of a limited number of large firms.  Multipoint Competition: When two or more enterprises encounter each other in different regional markets, national markets or industries.

61. 2-61 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Theories of Foreign Direct Investment The Eclectic Paradigm –The eclectic paradigm has been championed by the British economist John Dunning. –Dunning argues that in addition to ownership advantages and internalisation advantages, location-specific advantages (OIL) are also of considerable importance in explaining both the rationale for and the direction of foreign direct investment.

62. 2-62 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Theories of Foreign Direct Investment The Stage Models of Internationalisation –Stage Theory: An incremental sequential approach to internationalisation –The Uppsala Models (U-Models)  Stage 1: No regular export activity  Stage 2: Export via independent representatives  Stage 3: Establishment of an overseas sales subsidiary  Stage 4: Overseas production/manufacturing units

63. 2-63 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Theories of Foreign Direct Investment Johanson and Vahlne’s U-Model

64. 2-64 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Theories of Foreign Direct Investment The Stage Models of Internationalisation –Innovation Models (I-Models)  The body of research referred to as I-Models encompasses a number of studies.  Innovation-related models differ from the U-Models in that they view exporting as an innovation for the firm.  The internationalisation process is a series of innovations for the firm.  The focus of these models is primarily on the export development process of SMEs.

65. 2-65 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Summary of Main Themes This chapter has reviewed a number of theories that explain why it is beneficial for a country to engage in international trade and has explained the pattern of international trade observed in the world economy. In addition, we have discussed some of the theories of why firms undertake FDI as well as the recent theoretical developments in explaining the internationalisation process of small to medium-sized enterprises and the emerging trend towards rapid internationalisation by firms.